This financial planning project is split into several parts

This financial planning project is split into several parts

Each section has its own tab.

Section

Problem Introduction TAB

This tab

Gustafson Financial Information TAB

You will find all the given data here

1 Cost of Capital : Capital Structure TAB

This section is split into two tabs: Cost of Capital A and Cost of Capital B

Cost of Capital A concentrates on the developing Gustafson Capital Structure

Problem:

a) Calculate the firm’s capital structure based on book and market values and compare with the target capital structure.

2 Cost of Capital: WACC TAB

Cost of Capital B concentrates on calculating Gustafson’s WACC

b) Calculate the cost of debt based on the market return on the company’s existing bonds.

c) Calculate the cost of preferred stock based on the market return on the company’s existing preferred stock

d) Calculate the cost of retained earnings using three approaches, CAPM, dividend growth, and risk premium.

Reconcile the results into a single estimate

e) Estimate the cost of equity raised through the sale of new stock using the dividend growth approach

f) Calculate the WACC using equity from retained earnings based on your component cost estimates and the target capital structure

3 Capital Rationing: Finding the Breakpoints TAB

This section calculate the breakpoints

g) Where is the first breakpoint in the MCC (the point where retained earnings runs out)? Calculate to the nearest $.1M.

h) Calculate the WACC after the first breakpoint.

i) Where is the second breakpoint in the MCC (the point at which the cost of debt increases.)

j) Calculate the WACC after the second break. Calculate to the nearest $0.1M.

4 MCC – IOS Plot TAB

In this section we plot the Marginal Cost of Capital and the Investment Opportunity Schedule

This tab MCC-IOS is to be used as a template for your graphs

Use the Commands Insert>line and Insert>rectangle to create your plot

k) Plot Gustafson’s Marginal Cost of Capital.

l) Plot Gustafson’s IOS on the same axes as the MCC.

5 Capital Planning TAB

In this section, we analyze our data and make our conclusions

m) Which projects should be accepted and which should be rejected?

n) Do any of those rejected have IRRs above the initial WACC? Which ones?

o) If so, explain in words why they’re being rejected.

p) What is the WACC for the planning period?